FTSE AIM index down 30% in its 21 years of existence, but some AIM stocks have done well

Laith Khalaf, senior analyst, Hargreaves Lansdown says: “The AIM market may be 21 years old, but most of the companies listed on it are still pretty immature. It’s a market to go fishing in with a line and pole, rather than a great big net.

“The attraction of investing in smaller companies is plain to see from some of the success stories on the AIM market, but unfortunately there have been plenty of flops too.

“AIM shares have become more popular with private investors in recent years, partly as a result of them being allowed within ISAs, and the generous inheritance tax treatment. Successes like ASOS and Domino’s Pizza have also raised the profile of the market.

“However AIM is a market suited to investors who are sophisticated, brave and patient. Anyone who wants to gain exposure to smaller companies, but doesn’t have the expertise to pick stocks, should consider investing via a fund, where a professional investment manager picks a portfolio for you. This is an area where investment managers can really use their research resources to bear fruit, because the companies on AIM aren’t subject to the same level of global analysis as the big blue chips on the UK market.”

FTSE AIM has fallen 30% since launch

AIM market was launched on 19th June 1995, with the FTSE AIM index launched in January 1996 (6 months after the market opened). Yet the index is still 30% below its starting level. While AIM has been home to many individual success stories, the market as a whole has been a graveyard of failed ambition says Khalaf.

The performance of AIM compares poorly with indices from the main market over the same time period.

Khalaf says that the conclusion is AIM is not a market for investors to buy en masse in the same way they may do with the FTSE 100 through a tracker fund. Instead they need to approach it with a fine tooth comb to make sure they are picking out the winners and avoiding the deadwood, or alternatively buy a fund where a fund manager does this on their behalf.

Price return

Total return

(dividends re-invested)

22/01/1996 – 15/06/2016*

09/05/1997 – 15/06/2016*

FTSE AIM

-30%

-22%

FTSE 100

59%

143%

FTSE 250

300%

511%

FTSE Small Cap

124%

220%

*The AIM market launched in June 1995 but the FTSE AIM Index which measure performance was only launched 6 months later, in January 1996, with the total return index arriving in May 1997, performance data therefore dates back to the launch of these indices.

Three AIM success stories

ASOS is currently the biggest stock on AIM, with a market cap of £2.9 billion. £1,000 invested at launch in 2001 would now be worth £34,840. It currently commands an eye-watering P/E ratio of 60 times earnings. However it illustrates the kind of returns that get investors excited about AIM stocks. It also demonstrates that not all stocks on the AIM market are small companies. The market cap of ASOS is bigger than that of G4S, Sports Direct and William Hill. It’s big enough to be in the FTSE 250 if it was on the main market, as are around twenty of its fellow AIM stocks.

Domino’s Pizza launched on AIM in 1999 and has now graduated to the main market and the FTSE 250. £1,000 invested at launch would now be worth £11,030.

Majestic Wine launched on AIM in 1997 and remains there today. £1,000 invested at launch would now be worth £5,400.

AIM statistics

In 1995 AIM started with just 10 companies listed, worth in total £82 million. Today there are 1016 companies, worth in total £75 billion. The market was actually bigger in 2007 when there were 1,694 companies listed worth £98 billion.

Since 1995, 3,673 companies have been admitted to the market, and have collectively raised £97 billion.

Why invest in smaller companies?

Khalaf says smaller companies have much greater growth potential than the big blue chips, but the flip side is they are riskier. Often their fate lies in their own hands though, as their share prices are typically driven by what is going on in the company more than events unfolding in the wider economy. Investors should therefore consider smaller companies as a way of diversifying an existing blue chip portfolio, as well as for hunting out exceptional returns.

Mid caps should also be on investors’ radar. The FTSE 250 has been the best performing segment of the UK stock market over the last 20 or so years by quite some margin. Companies admitted to this portion of the market are often in a sweet spot because they have typically reached a size which gives them some measure of robustness, yet they still have lots of room left to grow.

Hargreaves suggests 5 ways to invest in smaller companies

A portfolio of individual shares. Investors looking to invest directly in smaller companies needn’t limit themselves to the AIM market, there are plenty of small companies on the main London Stock Exchange too. The FTSE Small Cap index contains around 300 such stocks, ranging in size from £30 million to £800 million. These companies don’t carry the same generous inheritance tax treatment as AIM shares however, but they do have to jump through more regulatory hoops to be listed on the main market.

UK Smaller Companies funds. Investors who have neither the time nor the inclination to research individual companies should consider investing in a smaller companies fund if they want to get exposure to this dynamic area. Marlborough UK Micro-Cap Growth and Schroder UK Dynamic Smaller Companies are two funds run by seasoned investors with great track records (Giles Hargreave and Paul Marriage respectively).

Global Smaller Companies funds. The UK doesn’t have a monopoly on smaller businesses, and a global fund opens up a much wider universe of companies for a talented stock picker to choose from. Harry Nimmo is one such manager, he runs the Standard Life Global Smaller Companies fund.

VCTs (Venture Capital Trusts) invest in a portfolio of typically around 20 fledgling companies selected and managed by a specialist fund manager. VCT investments qualify for 30% income tax relief provided you hold them for five years or more. The VCT dividends you receive are also free from tax and there is no capital gains tax to pay on any profits. Clearly the nature of these fledging companies means VCTs come with a high degree of risk.

An EIS (Enterprise Investment Scheme) is likewise a risky proposition because it invests in early stage companies, and tends to be less diversified than a VCT. The scheme also qualifies for 30% income tax relief on investments if they are held for three years, and profits are free from capital gains tax. An EIS investment also allows you to defer capital gains tax made on other assets, for instance a property, if made up to one year before or three years after the EIS investment.